Finance Minister Freeland's Capital Gains Tax： A Move for Intergenerational Fairness？
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Summary
In the inaugural episode of Hannaford, Jack Mintz talks about the new capital gains tax introduced by the Finance Minister Chrystia Freeland, why it's bad for ordinary people, and why it should be bad for investors.
Transcript
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Good evening, Western Standard viewers, and welcome to the first edition of Hannaford.
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In the weeks to come, we'll be talking to prominent Canadians who make news, do things,
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and think great thoughts. And we want to start this week with a man who is probably Canada's
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most distinguished economist, that would be Jack Mintz. Certainly when I was at the PMO,
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I always used to think, isn't it great that Dr. Mintz always gets his phone calls returned.
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Then later I found out that actually it was our office that was calling him. So it gives you
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some measure of the authority and the scholarship that lies behind the Mintz name. Many of you have
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seen his work in print since. He's been quite prolific. Jack, it's great to have you here.
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It's my pleasure, and I'm very happy to join your inaugural podcast.
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Thank you, Jack, and thank you for doing that. Look, maybe I could ask just by way of a starter,
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does the present government ever ask you what you think?
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Well, it depends which part of the government. I do hear from some of the departments with regard to
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some issues they may want to get some background on from me. So I do have that kind of communication,
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but I don't really hear from the PMO. I think I've been kind of dismissed.
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So, you know, the finance minister does not have you on speed dial?
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I think it's all of our loss that that is the case. Jack, I'd like to talk to you about two things today.
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One we talked about earlier is the critical tax theory, which sounds wild. But before we go there,
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maybe we could just talk about what has happened with the capital gains tax.
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It strikes me that an awful lot of people find the idea of a capital gains tax something that they
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either don't think they need to think about or maybe it's somebody else's problem. But recently,
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the finance minister, Chrystia Freeland, raised it significantly. What has she done?
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What is she trying to achieve? And is it going to work?
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Well, I think, first of all, she wanted more revenue to balance, well,
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at least try to keep her deficit from not getting higher than $40 billion that was promised
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this past year as one of the objectives. And of course, that included delaying expenditures, but it
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also included bringing in this new capital gains tax increase. And in fact, people were warned about
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it in the April budget that it would come in on June 25th, which it has. And of course,
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that would give people time to sell assets between the date of the budget and when the date of
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implementation, which of course would give more revenue to the government in the current year,
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all very helpful for the deficit, for sure. So I think that was a primary objective. But in terms of
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tax policy terms, I think the idea is one that actually I think is important to consider,
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because we have to remember at one time in Canada, we didn't have a capital gains tax. This was before
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1972. It was brought in in 1972 in a major tax reform at that time. And the reason we brought in capital
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gains taxation was that people would try to pay out income in the form of dividends and other,
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sorry, pay people out in the form of capital gains, rather than other forms of income like dividends,
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in order to avoid taxes on dividends, employment income, etc. And so to provide more balance in the
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system, the capital gains tax came in. But in recognition that actually capital gains is already
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taxed once at the corporate level. In other words, when companies reinvest their after tax profits,
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that causes the value of the firm to go up. And of course, if the corporate tax rate is higher,
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the less that capital gain is going to be for investors. So that was the logic for bringing in
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a capital gains tax rate that was lower than the ordinary tax rate, and in fact, roughly parallel
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with the dividend tax rate at that time. Now, Jack, we're talking a lot about companies reinvesting,
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corporations paying taxes. But I have a feeling that ordinary Canadians are going to feel this too,
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even though the finance minister says that it's only a very small and rarefied group at the top of the
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income charts that will. You, I believe, have done some calculations on how many people will be affected
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by the capital gains tax, and the kind of things that are likely to be subject to capital gains, small
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businesses, family cottages, those sorts of things. Can you just expand on what it means for ordinary
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people who may get a once in a lifetime capital gain? But how many are there? Well, I think, first of all,
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the minister was very wrong in the way that the data was reported, where she said only 1.4% of taxpayers
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would be affected. This is kind of gives an idea that the people who get over $250,000 in capital gains
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because the new rate applies to only capital gains in excess of $250,000. And it was the impression was
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given that these people tend to get capital gains like that every year. And so it's the same small
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number of people that are going to be affected. That was totally wrong. Because on a lifetime basis,
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there are many people that get more than $250,000 of capital gains in a year, but they may only do it
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once or twice in their lifetime. A good example of that, of course, is, you know, someone who buys a
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cottage in 1980. And let's say the cost of that cottage was $100,000. And then they sell it for
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40, 45 years later for, let's say $500,000. So there's a capital gain of $400,000. But some of
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that is just simply due to inflation. And it's not, and, and often this kind of money is what people use
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for their retirement, as well, just like all the money that's put into a pension fund or an RSP.
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There's a huge amount of money that pays out an annual pension every year. So it's, it's when you
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actually look at the data, and I did this, there were, there's a lot of people who without the $250,000
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in capital gains, and this was just in the recent data, if they didn't get over $250,000 in capital gains,
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their actual income tax taxable income, half the population was below $100,000. So a lot of middle
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class people were affected. In fact, 10% of the population would have only only had $18,000 in taxable
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income. And that might be surprising, but I'm not surprised because there could be people who died
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leaving in the state that subject to the capital gains tax at that point. And they don't have a
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lot of income at that point. And it also could be farmers, for example, they tend not to have a lot
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of money every year, not a lot of cash. But the one thing they do have is land. And of course, when they
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die, or if they sell their land, and that's the time when they get a lot of money through, you know,
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by selling their, their property, which is, of course, part of their retirement income,
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when they do retire. So there's a lot of middle class people that are going to be affected.
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So I found, I was given some data that Statistics Canada has put together. And what it's shown is that
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in 2011, for example, there were about 44,000 people that had capital gains more than $250,000.
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However, out of that 44,000, two thirds only claimed capital gains of that amount in that year.
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In the next 10 years, they didn't claim it at all. So two thirds of that 44,000 people
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only claimed capital gains more than $250,000 in just one year, and had less than that in other years.
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So we didn't have any, you know, didn't have capital gains that would go over the $250,000 mark.
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And so that's, that's, I did a calculation, sort of taking into account the whole population,
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to find how much on a lifetime basis, people actually do pay capital, this capital gains tax
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rate that will now be over $250,000. And I calculated, and this is a rough estimate,
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I admit, because I didn't have all the data that I would have liked, but I estimated about 1.25 million
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people are affected by the gains tax increase for this year, not just 44,000 people.
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So to put this in very human terms, I mean, you mentioned the cottages, you mentioned the transfer
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of land. I mean, these are things that people do, and there's nothing wrong with that. But it does sound
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like we're already talking about people who are wealthier than the average. Let's take the case
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of a person who starts a small business manufacturing something in an industrial
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estate in southeast Calgary, starts it in 1980 with a loan from his dad, works hard at it for 45 years,
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wants to sell out so that he can retire in some comfort, and that business that he built that was
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worth nothing when he started is now worth $1,000,000. He is going to be giving what,
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two thirds of that to the government? Is that really how this is going to work?
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No, it's not two thirds. So the way the capital gains tax increase or tax operates
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under the pre-June 25th rules is that when a person sells their property, they calculate the
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difference between the sale price and the original cost of buying that property. That's the capital
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gain. Then in the previous or under the current previous June 25th situation, one half of that
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gain is included as taxable income and then subject to the tax rate. And let's say if you were at the top
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Alberta rate, for example, 48%, then the capital gains tax rate is 24% on, on the, on the total capital
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gain. So, so in case of a, let's say a person that has a million dollar capital gain from selling a
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small business, he would pay about $240,000 in capital gains taxes under the old system. Under the
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new system, uh, because the first, uh, the first $250,000 of the capital gain is still taxed at, uh, only
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one half is included in income and taxed at the 24% rate. However, uh, the next $750,000 is going to be
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taxed at the capital gain, uh, at an occlusion rate of, uh, two, two thirds instead of one half. So, uh,
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two thirds of $750,000 is $500,000 and, uh, the, and the tax rate, uh, is, uh, 48, uh, 48%, uh, on that.
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So that means a person will end up paying, uh, very close to $250,000 in capital gains, uh, on the 750,000
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and he, and he will pay on the $250,000, he will pay, uh, uh, $125,000. So when you add the two up, uh,
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you can see it's a, it's a very significant increase in the amount of tax to be paid, uh, because of that
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extra tax, it's going to be on in, on capital gains more than $250,000. And so that's case of, uh, of that
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small business owner, for example. So they, okay. Now I believe that the finance minister makes the case
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for this on the basis of intergenerational fairness. Is there any fairness in this that you can see,
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Jack? I mean, is there a, is there a positive side to this? Cause it sounds outrageous.
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Well, you know, it's kind of, well, first of all, there, there, uh, there was a huge mistake again
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made in the, by the minister and the budget in the way they discussed the issue. They were, they were
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comparing capital gains tax rate. Uh, let's say that someone pays, um, uh, on capital gains, uh,
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uh, from, from, let's say their bit, you know, from, uh, selling their business assets or, or, or,
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or whatever property. Um, and they were comparing that tax rate to let's say the tax rate on employment
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income. So, uh, let's say in Alberta, the, uh, tax rate on employment income, 40%, just to, uh, give an
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example. And the capital gains tax rate might be under the old system would be 20%. And they would
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say, Ooh, that's very unfair. However, what was not mentioned is that capital gains were already,
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uh, taxed under the corporate income tax. And, and in fact, uh, there's a very close relationship
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between the dividend tax rate and the dividend tax credit and the capital gains inclusion rate,
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where those, those are provided in the system as a offset for the corporate tax that's already been
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paid on the profits before, uh, before they're distributed or, or reinvested. And so the capital,
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uh, so, uh, really the capital gains tax, the capital gains tax tax rate really is not just the
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personal rate, but you have to add in also the corporate tax, uh, that was paid, uh, in addition
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to that. And that could actually bring it up to 40%. So there was no, no particular, uh, unfairness
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in that sense. Um, now, uh, there, there isn't, uh, now there is another aspect to this and that is
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capital gains taxes are paid on, on, on the actual nominal income without any adjustment for inflation.
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If we made an adjustment for inflation, the actual gain is much smaller because people, uh, have lost
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value of their, their money because of inflation, the purchasing power of their money has fallen
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because inflation over the years. So the actual capital gains tax rate, uh, on what you might call
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real capital gains after you adjust for inflation is going to be significantly higher, uh, than the
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number that's often given, uh, in comparison, um, uh, the, you know, the way the number is normally
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reported like 25%, the real rate could be like 50% or 60%, uh, depending on how much of the game has
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been reduced by inflation. So that is also not, uh, included in the way of thinking about how much tax
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is actually paid on capital gains. Jack, I found it absolutely astonishing that a government with all
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the resources and advice at its, uh, disposal could make a mistake of that magnitude. Um,
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I could add just one more, one more, uh, with regard to intergenerational equity, it's, it's interesting
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that no one has actually really, uh, put this in, in these terms. Um, but under the, uh, under, you know,
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when people pass away or, you know, as they get close to the end of their life, they gift their
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money, either as donations or they give it to their children. And so there is intergenerational equity
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in the sense that people do pass on their wealth, uh, to the next generation, uh, but they, or, or to
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the people that they want to donate to. And that's what you might think of as individuals making that
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decision for themselves who they want to support. Uh, and, and of course there's a lot of people
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that do donate their property, not just give it to their children. When the government taxes the
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property as in the capital gains tax for intergenerational equity, what they are doing is making
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the decision for the people about who should benefit from those taxes. Uh, and of course, uh,
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I think it's one thing that Canadians would support if the money was going into something like
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healthcare, but as we know with this government, uh, at the federal level, there's been a huge
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expansion in the public service. There's been huge amounts of money given out to contracts. Some of it
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looking, looks like it was corrupt in the way that it was done. Um, and, and there's been a lot of, uh,
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grants paid out. Perhaps the people were, we're not sure we really would have wanted to give those grants to.
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And so are, is there really generational equity that's being, being enhanced, uh, when you have
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a government that's using the money in ways that are, that has nothing to do with intergenerational
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equity, but instead for politicking in terms of, uh, getting more support from their base.
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I can feel another column coming on Jack. Um, Jack, you mentioned inflation. They say it's 2.7%,
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but it doesn't feel like 2.7%. Why is that? Well, inflation, uh, you know, when we talk about
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inflation, we, we often talk about the current rate, which is, uh, 2.7%, which is how much consumer
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prices have gone up over the past year. Uh, let's say, you know, if we're talking about June, uh, 2024,
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then we look at the rate from July of 20, uh, 23 consumer prices from the end up until, uh,
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the end of June. And, and that would give us a year over year, uh, inflation rate, like 2.7%.
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Uh, but people, uh, aren't looking at inflate, uh, inflation rates. Uh, the bank of Canada does,
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in fact, they should do because they want to see how the trend in inflation is changing,
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because that's a guide to their industry policy. But for individuals, what they care about is the
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price level. In other words, the cumulative change in prices over time. And of course, since, uh,
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beginning of, uh, 21, uh, you know, after the pandemic, uh, prices have climbed up quite a bit.
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Uh, you know, food prices have gone up, uh, over 20%, uh, shelter prices over 20%,
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gasoline prices, 60%, uh, et cetera. And it would be one thing if people's incomes kept up with
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inflation. Uh, but that's not what happened, uh, for several years now inflation is a little bit
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below the wage increases, but that's only been in the past year. So when people look at their
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position today and they think about what it was like, let's say at the, uh, you know, before the
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pandemic, they feel their money is being stretched. They don't have as much money to spend because
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prices have gone up so much more, uh, than their incomes, uh, that they, that they are unhappy as a
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result. And so it's a past, the cumulative change that matters to people, uh, not the actual inflation
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rate when it comes to their budget. Jack, if a man was, or a woman was earning a hundred thousand
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dollars a year in the year 2021, what would they need to be earning today to have the equivalent
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purchasing power that they had three years ago? I've calculated that and I'm not sure if I
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remember it correctly, but, uh, it is something, uh, in the 15% range or 20%. Really? Well, that's
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terrible. Okay. Jack is one of the thing that's buzzing around at the moment that is a critical
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tax theory. We've heard of critical race theory where I guess the idea is that the system is rigged so
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that certain groups can do well and other ones don't, and that's not fair. Now, what is critical
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tax theory? I, I see the Canadian tax council is looking for learned papers on it. What would you tell
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them? Well, actually, it's a, it's a good question. In fact, uh, in one week I had two requests, uh, uh,
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to, uh, with regard to papers or, you know, uh, one was from the cane tax foundation, which is excellent
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place. And they, their Canadian tax journal runs policy forms and they wanted to do a policy form
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on critical tax theory. Uh, but I also got a message from, uh, tax notes, which is a major us, uh, publication
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for, um, practitioners and many people get around the world. In fact, I get tax notes international,
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which is, uh, one of their three publications and, uh, and it goes through like 50,000 people
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in terms of tax practitioners. Uh, and they were also asking for papers on critical tax theory.
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So I thought, uh, Jean, I, I don't know a lot about this. So I decided to read a whole bunch of papers
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of critical tax theory. And what critical tax theory basically says is that, you know, we, we look at the
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way, uh, we tax people according to differences in income. Uh, but income is not the only thing that
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matters in terms of looking at differences in people. Uh, uh, you know, there's other factors
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that are important. Uh, and I think that's fair enough. I think most people would agree with that
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statement. Um, but then they would make the jump and this is where I find it very difficult to jump.
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Uh, but then they say, well, they differ according to race, sexual orientation, uh, uh, gender, um, you
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know, uh, et cetera. Uh, and, and they talk about, uh, the need for social justice. Um, when I say there's a
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jump, you know, it, it, it sort of already goes into a certain direction, which is, has been very common
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in critical race theory, looking at certain people that are identified as being disadvantaged. Uh,
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although there's a lot of other people who are disadvantaged that may not fall on those categories,
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but that's that's point. Uh, but that's what they do. And so then they start looking at, uh,
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different policies in terms of whether it's, uh, you know, it's disadvantageous to, to, to certain races
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or, or gender, et cetera. And, and, and we should be fixed dated on that and make changes, uh, in terms
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of tax policy for that purpose. Um, so just to take an extreme case, which I haven't seen anyone really
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argue with, but, uh, if I was going to ask a question with my students, if you're applying critical
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tax theory, uh, should we have a, a different income tax schedule, uh, for let's say, uh, blacks,
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versus Asians and whites, uh, where maybe the blacks would get a higher exemption levels, more,
00:24:02.360
lower marginal tax rates, uh, according to brackets, uh, compared to let's say whites and Asians who do
00:24:08.120
better. Uh, is this an implication of critical tax theory? Now you said that this was an extreme
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example and that nobody has actually floated that yet. Do you see that coming? And can you give us
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an example of something that has been proposed? Well, there has been, some of it is actually,
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kind of logical in the sense that, uh, I, I wouldn't even need critical tax theory. I just need
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good old tax principles to make an evaluation. So some of the discussion, especially in the United States
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has been, uh, let's say higher property tax payments, uh, made in certain neighborhoods like
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black neighborhoods, uh, and the kind of services they gather a lot less, uh, than, you know, what
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they're, you know, what they're relatively paying in terms of property taxes. Uh, and that certainly is
00:25:00.200
an unfairness. In fact, it was Portuguese living in that neighborhood. I would say it's unfair to the
00:25:06.120
Portuguese too. Uh, and in fact, basic tax policy would say if you have proper benefit taxation,
00:25:13.240
then you would want some alignment between municipal services and property taxes. Uh, and so I think,
00:25:20.600
that is just to me, uh, very sensible tax policy without getting into critical tax theory. Uh, and it
00:25:27.240
would apply to anybody that wouldn't just apply to certain designated groups. Uh, but then again,
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I've seen some proposals saying, for example, um, you know, low, uh, court reductions in corporate tax
00:25:39.960
rates are, are, are, are unfair to, to blacks and to, uh, let's say, uh, disabled people or, or whatever.
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And, uh, uh, and that I think assumes, uh, something about who pays the corporate tax, which is a
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fundamental area of disagreement by economists, uh, many will say that actually a lot of the corporate
00:26:03.720
tax has shifted back onto labor, uh, not onto capital owners, uh, especially in an open economy,
00:26:11.640
where, uh, capital will flee to other countries if you try to tax it. And so therefore, uh, you know,
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who ends up getting hurt by the corporate tax, uh, are, are the people that work because they end up
00:26:24.120
getting lower wages or getting fired, uh, from their jobs. So, so if that's, if that, if, if one
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believes that story and there's some significant evidence that that story applies to many countries,
00:26:37.480
at least to a certain extent, then, uh, then that would suggest that it would be very bad for, uh,
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let's say certain races or disadvantaged people if you raise corporate taxes, but the critical tax
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people seem to assume that corporate taxes are, uh, you know, paid by the powerful, by the rich,
00:26:58.200
and therefore, uh, should be raised. And to me, that's a wrong conclusion, uh, especially given
00:27:03.480
the data that we know today. Well, last question then, Jack, is the government of Canada, the present
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administration looking at introducing separate tax rates according to ethnic or group identity?
00:27:24.680
I don't think so. I hope not. Uh, I would be appalled if they did, uh, because I think that would
00:27:31.160
go against, I think, a sense of fairness, uh, amongst a lot of people. Uh, and again, I think it's because,
00:27:36.920
you know, income is, I think, a very good measure of how well someone is doing, and so they can
00:27:43.080
understand why rich people need more tax than poor people, but, uh, but I don't think, I think they
00:27:50.200
would have a lot of difficulty to say that certain groups in society should pay less tax than other
00:27:55.640
groups. Um, I don't know. I hope that they would, Jack. And I hope that you will be there in a position
00:28:01.800
to give your advice if that ever should come up. Right. Jack, this has been a pleasure. Thank you
00:28:09.000
so much for joining us. And for the Western Standard, I'm Nigel Hannibal.